The Growing Gap between Govt and Private Sector Benefits

When I was out in Kansas City at the Kauffman Foundation’s Economic Bloggers Forum, Mish Shedlock of the blog Global Economic Trend Analysis made a persuasive case that state and local finances were completely broken because gov’t workers were overpaid compared to the private sector. ( See here for one of his posts on the subject).

Mish got me thinking…So I decided to assemble some BLS data on the subject.

Not to mince words, here’s the payoff chart, that compares the benefits of state and local workers with private sector workers. (These figures are adjusted for inflation, and indexed to 2001I=100).

Yowza! Somewhere in 2004, the world changed, and we didn’t realize it. Employers in the private sector put a lid on the cost of benefits (which includes healthcare, retirement, vacation, and supplemental pay of all sorts). Meanwhile the cost of benefits in state and local govt jobs just kept rising, with barely any break, both before and after the financial bust. This is not good

To put it another way, the benefits gap between the public and private sectors has widened sharply since 2004.

(continues)

Let’s do a deep dive on benefits. First, though, let’s dispose of wages. While the benefits gap was increasing, the wage gap stayed roughly the same. In the chart below, real wages for state and local govts rise at roughly the same rate as the private sector.

Now let’s take a look at the two biggest contributors to the benefits gap, health insurance and retirement/ savings. This chart shows the per hour cost to employers in the public and private sectors. For health insurance, state and local governments contribute $4.45 per employee hour, compared to only $2.01 in the private sector. The gap is even bigger for retirement and savings–$3.19 per hour in the public sector, more than triple the $0.92 in the private sector.

It’s possible that these numbers are biased because the occupational mix in state and local government is different than the private sector. So I focused down to managers and professionals.

Not quite as bad, but state and local governments still provide a lot better benefits than the private sector. A public sector managerial or professional job has retirement benefits about twice that of a private sector managerial or professional position. And to the degree that public pension plans are underfunded, this difference actually understates the gap.

To round out the analysis, let’s look at the pattern of healthcare benefits and retirement benefits over the past five years.

You can’t tell from this chart, but healthcare spending rises at roughly the same rate for both public and private sector. The story for retirement, though, is completely different.

In the private sector, adjusted for inflation, employer spending on retirement benefits stagnated between 2004 and 2009. That’s right, just flat, even before the financial bust.

By comparison, state and local costs for retirement rose by 30% between 2004 and 2009, in real terms.

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Comments

And it won’t continue, because these places eventually collapse on themselves and implode. That’s what we’re seeing in Texas vs California today, as jobs in California disappear while Texas keeps on keeping on. Eventually people just leave, as we’re seeing Detroit get ablated away as people move to Houston and other cities without these idiotic state govts, leaving behind the unproductive to play their stupid games. With the idiotic moves going on in the federal govt right now, people could be leaving the country soon.

I would think States were impacted by those personal wealth metrics. Housing prices and construction pushed California’s State and local Budgets all the way. That wealth effect had the same impact nationally for most States. It lifted State Treasury’s and that goes to explaining the Sate largess to Union Employees. And most State Agencies should be considered as large business.

I think also the Bush Tax breaks gave people permission to extract more money by any effective investment. With the political climate businesses got the message that greater profits were allowed on the bottom line. Everything that is seen as the dynamic forces in the economy can also be faulted as removing equitable distributions to support labors wage. All that money from world sources and a Dow over 14,000 and with tax breaks and always greater profits allowed, you got system wide extraction of profits without that needed reinvestment in labor. So Pensions and Health Care follow a flat line.

The Bush Tax breaks didn’t give people “permission to extract money”. It was their money to begin with and they had the right to do with it as they pleased. The charts in this post show unequivocally that it wasn’t a “personal wealth matrix” of any sort but rather good old fashion socialism at work in government.

One more thing, businesses always want “greater profits” as the bottom line. And so, it is silly to imply as you have that businesses (or the free market) are somehow at fault for not “reinvesting in labor” because they were extracting profits. Your assumption is that the market needed to reinvest in labor.

In a bubble where you are acquiring assets to gain leverage, as during the last decade from 2004 onward. Competition requires your bid be higher to gain control of those assets. Competition selling products and services into that same bubble is still held in check by price and service to demand. Buying a house you would bid up the asset to acquire, but buying a SUV you are gifted with more product or service to take the deal. Bush’s tax breaks overall favored extraction of more wealth from the economy than retail sale, and even further the foreign products imported simple removed more value from production. Its tax advantage to stir investment over product value of labor. You can over extract profit with a negative social consequence. This is not about your money in taxes, its about the direction to gain profit systematically removing a social reinvestment.

Excellent post. For some reason, the govt. and corporate America no longer look at long term implications of their economic policy. After WWII the government’s long term investment through the GI Bill paid huge dividends. Many people got a free education, made lots of money, and subsequently spent lots of money making many large corporations fat in the process. For the last 30 years wages have been flat when adjusted for inflation and benefits are declining to boost the corporate bottom line. A college degree in Ca. from community colleges and the University of California used to be free for residents. California’s educated population powered the technological expansion that drove the Ca. economy for so long. A large number of highly educated Ca. residents made good money and filled the Ca. coffers through taxes paid. In 1970 Gov. Ronald Raegan instituted tuition for community colleges as well as for the University of California. This resulted in less tax revenue as tech companies were forced to outsource large portions of the work because of a less educated workforce. This resulted in less tax revenue which eventually led to California’s budget shortfalls in the 90’s.

Following September, 11th, 2001, public sentiment towards “public servants” changed. Also after the dot.com bust and generationaly low interest rates, housing prices rose rapidly. Homeowners were flush and thankfull. Police and Fireman were heroes. And when benefits for police and fire were placed before the voters, they were approved.

This change in public perception was not lost on the other public sector unions. With homeowners feeling flush and tax receipts rising, the public sector cashed in. No one cared about the future costs as is so often the case.

Change is incremental. The big difference when it comes to “civil servants” is that there are no “downward corrections”. They may wait for the tide to turn in their favour and then pounce, just like those in the private sector do. However, when a downward correction comes to the private sector, the public sector fears not (except for the few who have no seniority). Thus for “civil servants” it has alway been a ratchet up and never down.

There is still “life time” employment in the public sector. A life time of grade and step increases that has long ago disappeared from the private sector. That alone describes the difference. While in the private sector there are the skillfull and lucky few, in the public sector all boats rise and tides can be flat but they never drop.

The problem is as Mish points out, is that the assumed rate of returns are set to high on the public pension funds. Therefore the benefits per hour is understated. Yeah that is what they paid in but, it was not enough.

Furthermore, when the pension funds become underfunded they will be coming after the rest of us to make up for the shortfall.

How then can you possibly calculate the true cost per hour of benefits? I believe someone mentioned that the shortfall in pension systems might approach around a trillion dollars.

Look at the current interest rate environment and what if stocks mimic Japan after their debt bubble? Or even goes flat for 5 to 10 years? With projected rates of returns of in excess of 7% all of the pension funds will need huge cash infusions from tax payers.

This is why public employees need to be moved off defined benefit plans and to a 401k style plan that has a known liability.

Given the size of the pension system, one can see how falsely jacking the projected rate of return will create a mythological budget for a while until it catches up with them.

Dave, while what you say is undoubtedly true and will most definitely occur, many people fail to recognize by what processes these changes will result.

Unlike the private sector which is subject to market forces, the public sector believes it has **constitutional priority**. Savor that for a moment; yep, a two-class system whereby the taxpayers are the slaves.

So how does a unionized class with a rigid entitlement mentality react when it believes that 2-3% raises are “cuts”? It locks down; it refuses to negotiate; it pulls out its contractual guarantees.

Since public unions/workers will refuse to take the ‘easy’ way out via negotiated amendments, the taxpaying class is going to be forced to execute the nuclear option on a municipal basis across the land: bankruptcy.

That is why municipal debt is a very risky strategy. While at the macro level many entities could/can still reasonably service their debt loads, the ‘baby’ is going to be thrown out with the bathwater. That is, once a muni decides to take the BK route to resolve intractable union problem, why not stuff the bondholders while they’re at it?

BK is an expensive & timely option, yet still orders of magnitude cheaper than actually attempting to service skyrocketing benefits. So, once they’re in for a penny, might as well go in for a pound.

I think Dave’s comment is absolutely critical. Due to underfunding there’s a large and growing difference between what governments say these benefits cost and what these benefits are likely to actually cost in the long run. This is not nearly as big an issue for the private sector because of the much higher percentage of defined contribution plans. The BLS data, as I understand it, does not reflect this difference, thus the problem is potentially significantly worse than these charts make it out to be. It might make sense to note this issue in the main post as it’s potentially a pretty big issue.

Does this analysis change at all when one factors in the fact that many government pension systems are also substitutes for social security and that the total retirement benefit of many government workers may not include social security? Since the federal government is not permitted to mandate tax payments by local and state governments and by churches, many of them established independent retirement programs in lieu of social security. Therefore, teachers in Illinois, for example, are not permitted to collect social security if they collect on their state pensions. Medicare is not affected since that is funded independently by a tax paid by individuals.

I’d like to make the case that it’s much worse than implied by your article, for the following reasons:

1) I believe the retirement benefits spending you have plotted does not adequately capture the growth in retirement *promises*. Nor the possible increasing use of pension spiking and the like.

2) It seems your figures are an average over states and municipalities. This means some states would show much more modest increases while others (hello, CA, NJ, IL!) would show even worse increases.

3) In the public sector, a large percentage of workers are offered defined benefit plans, while these have been and continue to be phased out in the private sector, in favor of 401k plans. Recently, the private sectors retirement plans have been gutted by the market collapses, while pension promises in the public sector plans have gone up.

4) Finally, remember that any increase in pay or benes to public employees has to be paid for by taxes on the private sector. This, in effect, imposes pay and benefit *cuts* on the very people who have experienced stagnant wages and benefits (not to mention collapses in their 401k plans as mentioned above).

The policy of pay and benes at the cost of everyone else has lately been nothing short of a disaster.

Most Americans will not enjoy being slaves to their neighbors in the public sector. As the gap in pay and benefits widens — and as more Americans lose unemployment and have nowhere to go — this disparity of wealth outflow may lead to a bit of friction.

Be sure to maintain your bugout kits and vehicles. Plan alternate routes to your destination. As always, keep a backup generator, 3 months supply of food and drinking water, and lots of guns and ammunition.

Let’s not forget that as long as the State, city and counties are running deficits, that we should include interest on the overpayment of wages and benefits into the final equation. Not only are we overpaying, we are overpaying at interest.

Here is another example with construction unions. Federal and state laws insist on paying prevailing union wages. Cadillac wages and Cadillac benefits might be OK if we had the money to pay for them. The fact is typically on big projects they will issue 10 or 20 year bonds.

So what we end up with is the overpayment of wages and benefits at interest. This totally magnifies the true cost of prevailing wages.

Obama discovered Cadillac benefits while massaging his health plan. Maybe he should have emphasized that a lot of these Cadillac plans come at taxpayer expense.

Now you would think that if Obama really cared about deficits, that he would do something about the buying of Cadilacs on credit with other peoples money.

You may be thinking “So what, how does this affect me? ” Let me give you a prime example at the state level. What have they done to traffic fines? We all know this is revenue generation, but in the case of California, the punishment no longer fits the crime, but rather the budget.

The next time you get a traffic ticket, think/thank Union when paying the fine. Is this what the people deserve?

Most importantly out of all this comparison of government wages verses private sector is that we are creating a government class of people verses the private sector. We must always remember that government is a liability and the private sector the asset. When government wages and benniftis are allowed to exceed the private sector, it will draw the best and the brightest away from the asset side of the equation and place them into the liability side.

While this shortchanges the private sector, it also degrades the asset on which the government needs to survive. The long term conclusion is that government will destroy itself.

I would offer to you that PRIVATE sector productivity has been growing at a strong rate through the 2000s. The reason the BLS data is not that impressive is because he low productivity of the public sector is dragging down the data.

If public sector compensation and headcount were to return to 1990s levels, the economy would boom, and the private sector would be able to expand again, scaling up all the major productivity gains they have generated.

Thanks for the data. At first I thought that something doesn’t jive here. For instance, the cost of Cobra inevitably shocks — I’ve never heard otherwise — and confirms evidence that health insurance through private employers is tremendously more costly than the charts indicate. Then I realized that the charts do not reflect how much of health care costs are born by the employee — it is often 100% and seldom 0% — part of the on-going transfer of risk to the individual. Obviously, the public sector has not gone nearly so far in that direction. For those who risk their health and lives on our behalf, I personally would not want it otherwise.

The situation is similar for retirement — the private sector is putting the burden on the employee to an ever greater extent, although employers do pay half of Social Security and sometimes make 401k contributions — many corporate new hires are promised no other retirement benefits. Correct me if I am wrong, but I think the public sector typically does not participate in Social Security and every entity has its own guidelines.

With regard to the economy at large (putting aside individuals for a moment), whether these things are covered by a tax or out-of-pocket, the bottom dollar impact on the economy is the same — the dollars are captive and not available for discretionary spending that could boost the economy. There is an upside in that probably 100% of retirement plan dollars will be spent at disbursement and thus serve as a built-in economic stimulus for younger people. I don’t mind that, but replenishing investment losses and making up for underfunding that was based on silly optimism do not thrill me. Maybe the underfunding was a blessing in disguise since it might enjoy lower risk treatment by being collected late.

At the individual level, it is a dicey situation. Anyone funding the majority of their own health care and/or their own retirement is likely to resent being taxed to fund the same for others if it is more generous than whatever subsidies they themselves get. It would be a lot of data but interesting to see states compared.

If the benefit funding becomes (or is) anything like the social security fund, it is well funded without reference to which party is in power because it will be a giant slush fund in the end. On the other hand it takes 20 years to retire with the government or military whereas 30 years is common in the private sector and this does not demonstrate the accumulation difference of 10 years with smaller contributions that would yield. http://bit.ly/dex0PQ

Your charts here show “excess compensation and benefits” for public sector employees vs. private sector. Your charts don’t show a comparison of “excess compensation and benefits” for US top management vs. the private sector. If they did, a more complete picture would emerge. As one commentator wrote on Mish’s blog:

Consider just excess billions given to top management in the FIRE financial sector (the finance, insurance, real estate sector). Remind me, how many billions in “bonuses” have been paid? Why not look at total US dollar outlay for of “excess compensation and benefits” for the FIRE top management? Would anyone be surprised to learn that “excess” total dollars paid out to FIRE management in the US (alone) far, far exceed the “excess” paid out to public sector employees?

Be fair. Why not compare top management vs. the private sector vs. the public sector? Why not add up how many billions of dollars of excess has been handed over to top management in the US and compare that to the excess that public workers get?

Anger at the government rank and file is exaggerated to the extent that the lion’s share of “excess” has gone to private sector top management.

That may have been true of the DWP workers, or even the Federal workers but when it comes to CA. state workers, they have not been given a raise in 5 years. Meanwhile the cost of their medical benefits in what they have to pay out is greater than the private sector. Most CA. state workers make so little that they have to work two jobs. Some work seven days a week with no break and never I mean never go on vacations. I have no idea where you got your research from but clearly it was not from CA. stats. check this out at: http://www.wusa9.com/money/story.aspx?storyid=98055&catid=37

Quote: State and local. State government employees had an average salary of $47,231 in 2008, about 5% less than comparable jobs in the private sector. City and county workers earned an average of $43,589, about 2% more than private workers in similar jobs. State and local workers have higher total compensation than private workers when the value of benefits is included.Unquote

Hi Mike,
If wages and health care costs have stayed approximately the same between govt. workers and the private sector .Where did this big difference come from. The retirement formula for fed workers is the same for guys of my era and the new retirement systems is
SS and your Investment account. What caused the big gap. Being a retired federal employee for 16 years and a retired CPO Navy my retirement money is determined by CPI alone (the phony CPI at that) Please explain the gap.

[…] economist for BusinessWeek, is now writing on his own blog. Please consider his latest post on The Growing Gap between Govt and Private Sector Benefits. When I was out in Kansas City at the Kauffman Foundation’s Economic Bloggers Forum, Mish […]

[…] Michael Mandel on the growing gap between government and private-sector benefits: “In the private sector, adjusted for inflation, employer spending on retirement benefits stagnated between 2004 and 2009. That’s right, just flat, even before the financial bust. By comparison, state and local costs for retirement rose by 30% between 2004 and 2009, in real terms.” […]

[…] we didn’t realize it,” says economist Mike Mandel, who has crunched a lot of numbers on the compensation of public- and private-sector employees over the past decade. A huge differentiator is retirement costs, which have risen 30 percent for […]

[…] economist for BusinessWeek, is now writing on his own blog. Please consider his latest post on The Growing Gap between Govt and Private Sector Benefits. When I was out in Kansas City at the Kauffman Foundation’s Economic Bloggers Forum, Mish […]

Michael Mandel is chief economic strategist at the Progressive Policy Institute. He is also president of South Mountain Economics, and senior fellow at Wharton's Mack Center for Technological Innovation